Fiserv, Inc. 2012 Form 10-K Summary
Business Context and Reporting Period
Fiserv is a global financial-services technology provider serving approximately 16,000 clients, primarily financial institutions, merchants, investment firms and government agencies. Its principal businesses are the Payments and Financial segments, supported by recurring account- and transaction-based contracts generally lasting three to five years. This filing covers the fiscal year ended December 31, 2012; fourth-quarter data is included in the unaudited quarterly table.
- Payments provides electronic bill payment, card processing, digital banking, mobile and person-to-person payments, investment services and risk-management solutions.
- Financial provides account processing, item processing, lending, source capture and related services.
- Processing and services revenue represented 83% of consolidated revenue in 2012; international revenue represented 7%.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $4,482 million | $4,337 million | +3% |
| Processing and services revenue | $3,709 million | $3,543 million | +5% |
| Product revenue | $773 million | $794 million | -3% |
| Operating income | $1,056 million | $996 million | +6% |
| Operating margin | 23.6% | 23.0% | +60 basis points |
| Income from continuing operations | $597 million | $491 million | +22% |
| Net income | $611 million | $472 million | +29% |
| Diluted EPS from continuing operations | $4.34 | $3.40 | +28% |
| Net cash from operating activities | $835 million | $953 million | -12% |
| Capital expenditures | $195 million | $192 million | +2% |
Payments revenue increased 5% to $2,489 million and Financial revenue increased 2% to $2,040 million. Payments operating margin was 26.8%, compared with 27.5% in 2011; Financial operating margin improved to 32.0% from 30.6%.
At December 31, 2012, cash and cash equivalents were $358 million, total assets were $8.497 billion, shareholders’ equity was $3.417 billion and total debt, including current maturities, was $3.230 billion. The company had no material current debt maturities beyond $2 million and was in compliance with its debt covenants. Its revolving credit facility was expanded to $2.0 billion and had $280 million outstanding at year-end.
Fiserv repurchased $634 million of common stock in 2012 and does not pay a dividend. Goodwill and intangible assets totaled approximately $6.479 billion, or 76% of total assets. The fourth-quarter 2012 revenue was $1,156 million, operating income was $289 million, income from continuing operations was $159 million and diluted continuing-operations EPS was $1.18.
Material Changes Versus the Prior Comparable Period
- Revenue growth slowed to 3% from 5% in 2011, while operating income growth improved to 6% from a 1% decline in 2011.
- Recurring processing and services revenue increased 5%, driven by new clients and higher transaction volumes in card services, digital channels, account processing and lending.
- Product revenue declined because of lower software-license revenue; the product cost ratio increased to 81.2% from 75.7%.
- Operating margin improved because of operating leverage and efficiency initiatives, partially offset by higher development and integration costs, postage pass-through costs and weaker Payments margins.
- Interest expense declined to $174 million from $188 million. The 2011 results included an $85 million loss on early debt extinguishment; no comparable charge was recorded in 2012.
- Operating cash flow declined primarily because of an $88 million payment to settle forward-starting interest-rate swaps and unfavorable working-capital changes.
- Share count continued to decline through repurchases: weighted-average diluted shares fell to 137.5 million from 144.2 million.
Guidance, Outlook, Commentary and Risks
Management’s stated 2013 priorities were to deliver high-quality revenue growth and meet earnings commitments, deepen client relationships, expand strategic solutions, and enhance client results through innovation and integration. The filing does not provide a clear numerical 2013 revenue or earnings guidance figure.
Management expects long-term benefits from financial institutions outsourcing technology, increasing electronic and mobile transactions, and adopting integrated payment and digital-channel solutions. The company also expects demand for products that improve client efficiency, generate revenue and support customer retention.
- On January 14, 2013, Fiserv acquired Open Solutions for $55 million in cash and assumed approximately $960 million of debt. The acquisition is expected to expand the Financial segment and add more than 3,300 clients; integration costs are expected, and pro forma results were not provided.
- Fiserv issued $700 million of 3.5% senior notes due 2022 and used proceeds primarily to repay its senior term loan. Interest-rate hedges were settled, requiring an $88 million cash payment; approximately $84 million remains in accumulated other comprehensive loss for future interest-expense recognition.
- Key risks include economic weakness among financial-institution clients, competition and pricing pressure, client contract nonrenewals, industry consolidation, regulatory changes including Dodd-Frank, cybersecurity and operational failures, software defects, acquisition integration, intellectual-property claims, regulatory compliance and goodwill or intangible-asset impairment.
- Subscriber funds, which are excluded from the balance sheet, totaled approximately $1.6 billion at year-end. Litigation liabilities were not expected by management to have a material effect.
- Credit ratings were Baa2 with a stable outlook from Moody’s and BBB- with a stable outlook from S&P. A downgrade below investment grade could increase senior-note interest rates by up to two percentage points.
Most Important Facts to Verify
- Whether recurring revenue growth and contract-renewal rates remain strong after the loss of an electronic bill-payment client through a client acquisition.
- The post-acquisition leverage, integration costs, debt repayment and operating contribution of Open Solutions.
- Whether Payments margin pressure from lower software-license revenue, postage pass-through costs and investment in Popmoney and Mobiliti persists.
- The sustainability of operating cash flow after the nonrecurring swap settlement and working-capital effects.
- The concentration and valuation risk associated with goodwill and intangible assets representing 76% of total assets.
- Future debt maturities, interest-rate exposure, credit-rating changes and compliance with revolving-credit covenants.
- Progress on cybersecurity, operational resilience, regulatory compliance and the phased SAP billing-module implementation.